Why do these scams keep succeeding? From Ponzi schemes to modern variants

When it comes to “Ponzi schemes,” many people are filled with intense hatred—they exploit human weaknesses, weave dreams of wealth, but sweep victims’ hard-earned money into oblivion. Interestingly, most scams in the financial fraud realm can be traced back to some variant of this pattern. Although we’ve all heard the name, few truly understand its origins, operational logic, and prevention methods. Today, we delve into the evolution of this century-old scam, analyze several landmark cases, and explore how to keep your money safer.

From an Italian Immigrant to the “Father of Finance”: A Dark Legend

The name “Ponzi scheme” originates from Charles Ponzi, an Italian immigrant. The operation of such scams seems simple: promise investors low risk and high returns to attract their funds. But the “returns” are not derived from real business or asset appreciation; instead, it’s a mathematical game—using new entrants’ money to pay the “profits” of earlier investors. Once new funds dry up, the entire system collapses instantly, and the scammer flees with the remaining money.

Ponzi’s own life story is quite legendary. In 1903, after sneaking into the U.S., he worked as a painter, laborer, and more. He was imprisoned in Canada for forgery and later jailed in Atlanta for human trafficking. After experiencing the collision with the American Dream, he realized that finance was the quickest way to amass wealth.

1919 was a pivotal year—World War I had just ended, and the global economy was in chaos. Ponzi sensed an opportunity, claiming he could buy European postal notes and resell them in the U.S. for huge profits. He designed a seemingly complex but fundamentally flawed investment scheme, aggressively promoting it to Boston residents.

The results were shocking: in just about a year, around 40,000 Boston residents were drawn in, mostly wage earners dreaming of wealth, each investing a few hundred dollars. These people had only partial or no understanding of finance. A local financial newspaper pointed out the scheme’s flaws, stating it was impossible to make money. But Ponzi responded with articles defending himself while increasing temptation. He claimed investors could get 50% returns in 45 days. When the earliest investors indeed received interest, later investors flocked in.

This scheme finally collapsed in August 1920, and Ponzi was sentenced to five years in prison. Since then, “Ponzi scheme” has become a term for a type of financial scam—an eternal pattern of deception.

Modern Variants: Larger Scale, More Discreet Tactics

Madoff: The 20-Year Lie of Wall Street’s “Evergreen”

If we were to pick an upgraded version of the “Ponzi scheme,” Bernard Madoff’s scam would top the list. It operated for a full 20 years before being exposed.

Bernard L. Madoff was a heavyweight in the U.S. financial scene, former NASDAQ chairman, with extensive connections. He infiltrated high-end Jewish social circles, leveraging trust among friends, family, and business partners, recruiting investors like a snowball. In the end, he attracted $17.5 billion into his meticulously constructed fake account system.

Madoff promised investors steady annual returns of about 10%, boasting that he could “profit steadily in rising and falling markets.” The fatal flaw in this promise was—it’s a violation of fundamental investment principles. In reality, the so-called interest was entirely fabricated, created from the principal of investors and other clients.

When the 2008 global financial crisis hit, the situation spiraled out of control. Investors began massive withdrawals seeking cash. By 2009, the scam was exposed, and Madoff was sentenced to 150 years in prison. The total loss was estimated at $64.8 billion, setting a record in U.S. history.

PlusToken: A Blockchain-Backed Pyramid Scheme Trap

With the advent of cryptocurrency, scammers learned to use new concepts to deceive. PlusToken wallet is a prime example—dubbed by the internet as the third-largest Ponzi scheme in history.

Chainalysis, a blockchain analysis firm, reported that the scam gang operating under the guise of PlusToken defrauded about $2 billion worth of cryptocurrencies in China and Southeast Asia, with $185 million already cashed out.

This project claimed to develop a wallet app based on blockchain technology, promoted in China and Southeast Asia. It promised users monthly returns of 6%-18%, claiming these interest payments came from crypto trading arbitrage. But essentially, PlusToken was a pyramid scheme disguised as a “blockchain” project.

In June 2019, when PlusToken suddenly couldn’t process withdrawals and customer service stopped, thousands of investors lacking deep blockchain knowledge realized—they had lost everything. The scam had run for over a year, costing countless victims dearly.

Why Do We Keep Falling for These?

After reading these cases, you might ask: why do such scams persist for so long and deceive so many?

The root causes are threefold:

First, scammers exploit human greed. Everyone may harbor a desire to get rich without effort. When scammers weave a “sure-win” dream with data, promises, and celebrity endorsements, these dreams drown our rational vigilance.

Second, a lack of financial knowledge creates information asymmetry. Ordinary investors often have only partial understanding of investment principles, risk management, and market laws. Scammers exploit this by using seemingly professional jargon and complex systems to create false authority.

Third, trust is systematically abused. Whether it’s Madoff leveraging social trust or PlusToken borrowing the hype around blockchain, scammers build layer upon layer on the foundation of “trust.”

Ten Practical Defenses to Protect Your Investments

Having understood the scam patterns, how can we prevent falling prey? Here are ten tips:

1. Always be suspicious of “low risk + high return” combos
The basic rule of investing is that risk and return are proportional. If someone claims to offer “daily profits of 1%” or “monthly returns of 30%” with no mention of risk, it’s 99% a scam. Such opportunities simply don’t exist in legitimate markets.

2. No risk-free investment exists on this planet
Madoff promised “guaranteed profits with no losses,” but any real investment is affected by economic cycles, market fluctuations, and policy changes. Projects promising 100% capital preservation or fixed yields are lying.

3. Demand in-depth understanding of the investment product and strategy
Scammers like to cloak their schemes in mystery, using obscure jargon to create a “high-end” illusion. But if you ask serious questions, they either stammer or make excuses. Legitimate investments have clear logic and profit models that can be explained.

4. Conduct thorough due diligence on basic project info
If the project team always dodges questions or shifts blame, it’s a red flag. Legitimate projects are willing to disclose information; scammers fear scrutiny.

5. Use the internet to research background info
Check the company’s registration, capital, scope of business via official business registration sites. If the project isn’t legally registered or info conflicts with promotional materials, question it immediately.

6. Beware of “withdrawal difficulties” as a warning sign
Ponzi schemes often set up obstacles to prevent withdrawals—raising fees, changing withdrawal rules at will, delaying processing. Any platform that makes you feel “hard to cash out” should raise suspicion.

7. Recognize “pyramid” invitation patterns
If the project mainly relies on “recruitment” or “downline development,” and someone enthusiastically emphasizes “high commissions for referrals,” it’s typical of pyramid schemes. Variants of Ponzi often hide behind such invitations.

8. Seek advice from professionals
When unsure about an investment, consult licensed financial advisors, investment consultants, or lawyers. Spending a little on professional analysis is far better than losing thousands.

9. Investigate the project initiator and background thoroughly
Ponzi schemers often pose as “genius investors” or “industry legends.” If the founder has false resumes, exaggerated achievements, or hard-to-verify backgrounds, be extra cautious.

10. Always remember: “There are no free lunches”
This is the ultimate mantra for avoiding scams. Scammers prey on greed, using promises of “huge returns” to lure victims. Staying alert, controlling desires, and sticking to bottom-line principles can help you avoid most traps.

Final Words

From Charles Ponzi to Bernard Madoff, and to the PlusToken organizers, history repeats itself, but scammers evolve. Each generation uses the most popular concepts and technologies of its time to package this eternal deception.

But the essence remains unchanged: promises of low risk + high return, concealing risks, using new money to pay old debts, and ultimately bankruptcy and fleeing.

If you remember the iron law of “risk and return are proportional,” maintain enough skepticism, ask repeatedly about complex projects, and say no to “free money” promises, it will be very hard for Ponzi schemes to trap you. May we all navigate the investment path without missing opportunities or becoming victims of scams.